Bad news for your Sipp provider may be good news for you

Many Sipp providers have felt a little gloomy of late. In December the regulator scolded Sipp providers before announcing tough new capital adequacy requirements.

But the changes proposed by the Financial Services Authority (FSA) are in fact very sensible and likely to benefit advisers.

When the FSA issued its capital adequacy paper (CP12/33) in November 2012, it was a response to a number of problems it said had been mounting among what it described as ‘small Sipp providers’.

Those included poor controls and record-keeping as well as a growing fear that Sipps were being used as vehicles to sell toxic investments.

The FSA concluded some Sipp providers will go bust, resulting in ‘significantly increased risk of harm to consumers’.

Therefore, the regulator will require Sipp providers to keep greater capital reserves, not relative to their expenditure, as is the case with many other firms, but relative to the size and riskiness of the investments the Sipp provider holds.

The effect of increased requirements

Many Sipp providers believe this is unfair. The hike impacts independent Sipp providers, as insured Sipps are not affected.

It also penalises commercial property holdings, which are listed as ‘non-standard’ assets alongside unregulated collective investment schemes. This is because the definition of ‘non-standard’ has more to do with liquidity than risk.

The likely outcome is that from 2014, Sipp providers will need to find vastly increased capital reserves just to continue operating their businesses. A firm that holds £50,000 capital today could be asked to hold over £1 million instead by 2014.